Covid-19 and the Reorganization and Bankruptcy Act

As a response to the economic crisis resulting from the Covid-19 pandemic, Congressman Hugo Leal presented the Bill (PL) 1397/20, whose objective is to institute emergency measures through amendments to some provisions of Law 11,101/2005, which regulates the In-Court Reorganization and Bankruptcy regime in Brazil.

These measures have an emergency and transitory nature and should remain in effect until December 2020 – or for the duration of Legislative Decree No. 6, of March 20, 2020, which recognizes the state of public calamity due to the Covid-19 pandemic.

The PL brings some emergency adjustments to the current legal regime that regulates insolvency in Brazil and is not to be confused with PL 10220/2018. The latter has been discussed extensively and in detail in recent years, to reflect a reform of Law 11,101/2005 as a substitute, and so far has not passed, although it is currently under urgent procedure.

In short, the PL establishes a legal suspension (during which all executive judicial proceedings involving discussion or fulfillment of obligations due after March 20, 2020 are suspended, , as well as contract revisions) a preventive negotiation procedure of voluntary jurisdiction, based on the European crisis prevention system, in addition to proposing several changes in the in-court and out-of-court reorganization and bankruptcy regimes.

These measures impact market agents in different ways. On the one hand, there are companies that are currently incurring material losses in their operations and facing serious cash flow problems, making it impracticable to regularly meet their obligations. On the other hand, there are national and foreign creditors and investors that may face defaults, extensions of payment terms and the temporary impediment of collecting their receivables, due to an urgent legislative change, which, in the opinion of some, may undermine legal security in Brazil and hinder the growth of the post-crisis economy.

In the midst of all this, one must also consider the impacts on the judiciary branch itself and judicial operators, as it is certain that the implementation of necessary measures will have a direct relation with the number of legal proceedings that will be distributed to the Brazilian courts.

The discussion is rich and relevant from all points of view. It is necessary to address the most relevant impacts of the emergency reform from the perspective of each of the groups mentioned above during this unprecedented times.

1 Luis Vasco Elias is Deloitte’s Corporate Restructuring leader

2 Ana Beatriz Nogueira is a partner of Deloitte’s Corporate Restructuring

With the collaboration of: Daniella Piha, Deloitte’s Corporate Restructuring director